American Economic Review Vol. 114 No. 10 2024
Dynamic Outside Options and Optimal Negotiation Strategies
Abstract
We study the design of negotiation strategies when a principal and agent must decide how to split a pie while the agent's outside option changes over time. The principal's optimal strategy under commitment demonstrates a new, but intuitive, set of negotiation dynamics. When the agent is tempted to leave, the principal gradually promises a larger share (decreasing demands) and more time to explore the outside option (decreasing pressure), illustrating a complementarity between these two tools. Although the principal's expected utility is decreasing in the outside option, his expected utility and demands are increasing in the outside option's drift and volatility.
- DOI
- 10.1257/aer.20230015
- Volume
- 114
- Issue
- 10
- Pages
- 3284-3313
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref